NEW YORK (
) -- FBR analyst Paul Miller said Monday that "mortgage banking will continue to be a dominant earnings driver through the end of 2012," and that the banking industry's first-quarter results "support the rally" in stock prices.
With "roughly 75% of the banking industry by assets having reported 1Q results," Miller expects the bank stock rally to continue, "as this quarter's solid earnings results, with the expectation of more to come, justify current valuations."
President Obama's expansion of the Home Affordable Refinance Program, or HARP 2, which allows borrowers with mortgage loans held by
to refinance their entire loan balances at today's low rates, no matter how much the value of the underlying home has dropped, has "yet to make a significant impact on the system," according to Miller.
Underlining the potential for growing mortgage originations to boost earnings this year, Miller said that "this quarter, mortgage banks reported some of the highest gain-on-sale margins we have seen in years," as the lenders quickly sell newly originated loans to the government-sponsored mortgage enterprises. Regional lenders are not only benefiting from HARP 2, they are absorbing business given up by
Bank of America
, which have been "significantly pulling back on correspondent lending, which decreased origination capacity."
Miller said that loan growth has been generally weak, with total loan balances growing "only 0.5% (sequentially) on average, aided by continued expansion in [commercial and industrial] and residential mortgage portfolios," with regional banks having the best growth prospects.
With the largest banks continuing "to trade at a discount to small- and mid-cap peers, even after having cut the valuation gap in half (on a [tangible book value] basis) since the beginning of the year," FBR said, "there is more room to run for the larger banks, as investors further appreciate a strengthening economy, potential regulatory reform, and the large caps' diversified revenue streams."
FBR "continues to encourage investors to put money into" the following three large banks and also notes "company-specific opportunities" for three regional banks, also listed below: